Treaty Residence for Inheritance & Gifts Germany–U.S.

Article 4 Germany–U.S. Estate & Gift Tax Treaty

Treaty residence for inheritance and gifts between Germany and the U.S.

The Germany–U.S. estate-and-gift-tax treaty uses its own concept of residence. Article 4 can materially affect the taxation of an estate or gift involving U.S. citizens, German citizens after emigration and individuals with residential ties to both countries. These rules differ both from the income tax treaty and from German domestic tax liability under Section 2 ErbStG.

Article 4(1)

Germany and the United States determine initial treaty residence differently

Article 4(1) first determines when an individual has residence in a contracting state for purposes of this special estate-and-gift-tax convention.

For the United States, an individual has treaty residence if the person is domiciled there or is a U.S. citizen. U.S. citizenship can therefore itself create U.S. residence for purposes of this treaty.

For Germany, treaty residence exists where the individual has a residence or habitual abode in Germany or is otherwise subject to unlimited German inheritance or gift tax liability.

Typical dual residence

A U.S. citizen living in Germany can initially have treaty residence in both countries

A common situation arises when a U.S. citizen moves to Germany. U.S. citizenship can create U.S. residence under Article 4(1), while a German home or habitual abode generally creates German residence at the same time.

The individual therefore initially has dual residence under the treaty. Article 4(2) generally determines which country becomes the relevant treaty-residence state, subject to the special rule in Article 4(3).

United States

U.S. citizen

U.S. citizenship can itself create U.S. residence under Article 4(1)(a).

Germany

German residence

A home or habitual abode in Germany can simultaneously create German treaty residence.

Article 4(2)

Dual residence is generally resolved through a four-step tie-breaker

If an individual has residence in both countries under Article 4(1), paragraph 2 generally assigns residence to one contracting state.

The sequence resembles familiar income-tax treaty tie-breakers but should be applied independently under the estate-and-gift-tax convention.

1. permanent home
2. center of vital interests
3. habitual abode
4. citizenship
dual citizenship or neither citizenship: competent-authority procedure

Tie-breaker in detail

The individual stages of Article 4(2)

Stage 1

Permanent home

If a permanent home is available only in one contracting state, treaty residence is generally assigned to that state.

Stage 2

Center of vital interests

If a permanent home exists in both countries, the individual's closer personal and economic relations are examined.

Stage 3

Habitual abode

If the center of vital interests cannot be determined, habitual abode becomes the next criterion.

Stage 4

Citizenship

If habitual abode exists in both or neither country, citizenship can become decisive. Dual citizens or persons who are citizens of neither state can require a competent-authority agreement.

Article 4(3)

The special ten-year rule can override the normal tie-breaker

Article 4(3) contains a particularly important rule for certain Germany–U.S. migration cases. Several conditions must be satisfied simultaneously.

The individual must be a citizen of one contracting state without also being a citizen of the other state. The individual must also have residence in both countries under Article 4(1), and residence in the other contracting state must have existed for no more than ten years.

If these conditions are met, treaty residence is assigned to the state of citizenship notwithstanding the ordinary tie-breaker in Article 4(2).

Requirements

When can the ten-year rule apply?

Requirement 1

Citizenship of only one state

The individual must be a citizen of one contracting state and must not also hold citizenship of the other contracting state.

Requirement 2

Residence in both countries

Under Article 4(1), the individual must initially have treaty residence in both Germany and the United States.

Requirement 3

No more than ten years

The residence in the other contracting state must have existed for no more than ten years at the relevant time.

Example: A person who is solely a U.S. citizen moves to Germany and establishes a German residence. U.S. citizenship can simultaneously create U.S. treaty residence under Article 4(1). If the remaining conditions are met and the German residence has existed for no more than ten years, Article 4(3) can continue to assign treaty residence to the United States.

Family members

Article 4(3) can extend to certain family members belonging to the household

The special rule does not concern only the individual whose citizenship and residence are being examined. The treaty can extend the residence treatment to family members belonging to that person's household if they satisfy the relevant conditions.

This addition is important because it does not mean that every later heir or donee is automatically covered by Article 4(3).

Section 2 ErbStG vs. Article 4

The German five-year rule is fundamentally different from the treaty ten-year rule

Under German domestic inheritance tax law, German citizens can continue to be treated as German residents after giving up their German residence if they have not been permanently abroad for more than five years.

This is a domestic German rule. It determines whether Germany has unlimited inheritance or gift tax jurisdiction under Section 2 ErbStG.

Article 4(3), by contrast, uses a period of up to ten years and determines treaty residence for purposes of allocating taxing rights under the Germany–U.S. estate-and-gift-tax convention.

Section 2 ErbStG

Five-year rule

Domestic German rule governing unlimited inheritance and gift tax liability of certain German citizens after emigration.

Article 4(3)

Ten-year rule

Treaty rule determining residence of certain individuals who have residence in both contracting states.

Why treaty residence matters

Residence affects the later allocation of taxing rights

Once treaty residence has been determined, the asset-allocation rules in Articles 5 to 9 and the tax-credit mechanism in Article 11 can be applied.

Treaty residence is therefore not merely a formal classification. It can materially affect the taxation of an entire estate or a substantial lifetime gift.

real estate under Article 5
permanent-establishment property under Article 6
partnership interests under Article 8
other property under Article 9
tax credits under Article 11
special issues involving estates and trusts

BFH, September 20, 2022 – II B 2/22

The German Federal Fiscal Court limited the reach of Article 4(3)

Bundesfinanzhof · II B 2/22

U.S. citizen living in Germany inherited from her aunt in the United States

The taxpayer was solely a U.S. citizen and lived in Germany. Following the death of her aunt in the United States, she received a death benefit from a U.S. retirement arrangement. Germany based its inheritance tax claim on the recipient's German residence.

Decision

Article 4(3) did not apply to the recipient

The BFH clarified that the special rule cannot be extended to a recipient outside the deceased's household merely because Germany taxes under Article 11(1)(b) based on the recipient's German residence.

Practical effect

Residence of the deceased and residence of the recipient must be analyzed separately

The treaty-residence rules applicable to a deceased or donor cannot automatically be transferred to an heir or donee. Article 11 can preserve a separate German taxing right based on the recipient's German residence.

Typical situations

When Article 4 is particularly important in practice

Case 1

U.S. citizen moves to Germany

U.S. citizenship and German residence can initially create dual treaty residence. If the German residence has existed for no more than ten years, Article 4(3) should be reviewed carefully.

Case 2

German citizen moves to the United States

After emigration, both the German five-year rule under Section 2 ErbStG and the separate treaty-residence rules can become relevant. They must be analyzed independently.

Case 3

German–U.S. dual citizen

Article 4(3) requires that the individual be a citizen of only one contracting state. The special rule therefore does not apply to a German–U.S. dual citizen.

Case 4

U.S. decedent – German heir

The deceased's treaty residence is determined under Article 4. Separately, Germany can tax because of the heir's German residence, making Article 11 relevant for double-tax relief.

Case 5

Donor has residential ties to both countries

Where homes and personal or economic relations exist in both Germany and the United States, the full tie-breaker analysis under Article 4(2) can become necessary.

Case 6

Gift shortly before the end of ten years

For a substantial lifetime transfer, the precise duration of residence in the other country can determine whether Article 4(3) still applies.

Relevant date

For an inheritance, the date of death matters; for a gift, the date of the gift matters

The Article 4 conditions are generally tested at the time of the deceased's death or at the time the gift is made.

This can be particularly important around a move between Germany and the United States. The date a home was given up or established, actual physical presence and the duration of residence in the other country should therefore be documented carefully.

Homes

Which homes were actually available at the relevant date?

Physical presence

Where did the individual actually and regularly spend time?

Vital interests

Where were the closer personal and economic relationships located?

Duration

How long had residence existed in the other contracting state?

Common mistakes

Issues frequently overlooked under Article 4

Using income-tax treaty residence

Residence under the estate-and-gift-tax convention must be determined independently.

Ignoring U.S. citizenship

U.S. citizenship can itself create U.S. residence under Article 4(1).

Going directly to the ordinary tie-breaker

Article 4(2) is expressly subject to the special rule in Article 4(3).

Mixing the five- and ten-year rules

Section 2 ErbStG and Article 4(3) operate at different levels of the analysis.

Applying Article 4(3) to dual citizens

The special rule requires that the individual not also be a citizen of the other contracting state.

Extending the rule to every beneficiary

The BFH has clarified that a recipient outside the deceased's household is not covered merely because Germany taxes based on that recipient's German residence.

Further guidance

Treaty residence for inheritance and gifts

Does a U.S. citizen always have U.S. residence under the estate tax treaty?

Article 4(1)(a) provides that an individual has residence in the United States if the person is domiciled there or is a U.S. citizen. A person can therefore initially have U.S. treaty residence based on citizenship even while living in Germany.

What happens if I have treaty residence in both Germany and the United States?

The tie-breaker in Article 4(2) generally applies, using permanent home, center of vital interests, habitual abode and citizenship. Before doing so, however, the special rule in Article 4(3) must be checked.

What is the ten-year rule?

Under certain conditions, Article 4(3) continues to assign treaty residence to the individual's country of citizenship where the person is a citizen of only one contracting state, has residence in both states and has lived in the other state for no more than ten years.

Does the ten-year rule apply to German–U.S. dual citizens?

No. Article 4(3) requires that the individual be a citizen of one contracting state without also being a citizen of the other contracting state.

Is the ten-year rule the same as the German five-year rule?

No. The five-year rule is part of Section 2 ErbStG and concerns domestic German inheritance and gift tax liability after emigration. Article 4(3) determines treaty residence for purposes of the Germany–U.S. estate-and-gift-tax convention.

Does Article 4(3) apply to an heir living in Germany?

Not automatically. In II B 2/22, the BFH clarified that the provision does not apply merely because Germany taxes a recipient outside the deceased's household based on that recipient's German residence.

Why is treaty residence so important?

Treaty residence affects the later application of the asset-allocation provisions and the tax-credit mechanism under Article 11.

Which date is relevant for treaty residence?

For an inheritance, the relevant facts are generally tested at the date of death. For a gift, the relevant date is the date the gift is made.

Germany–U.S. tax advice

Do you have residential ties to both Germany and the United States and plan a gift or estate transfer?

We analyze German tax liability under Section 2 ErbStG, treaty residence under Article 4, the special ten-year rule, the allocation of property under the estate-and-gift-tax treaty and the resulting German inheritance or gift tax consequences.

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